FRM Exam Part I · Foreign Exchange Markets

FX Market Structure and Quotations for FRM Part I

Updated 11 October 2026 · Fact-checked

The FX market is a decentralized, mostly over-the-counter market where dealers quote currency pairs as base/quote (base currency priced in quote currency). Each quote has a bid (dealer buys base) and an ask (dealer sells base). To solve questions, identify the base currency, pick the right side of the spread, and chain or invert rates for cross rates.

Understand FX Market Structure and Quotations

The foreign exchange market is the largest financial market in the world. It has no single exchange. Banks and dealers trade with each other and with clients by phone, electronic platforms and brokers, around the clock from Monday to Friday. This is why it is called an over-the-counter (OTC) market.

The main participants are dealers (large banks that quote two-way prices and make markets), corporations (hedging trade and investment flows), asset managers and hedge funds (investing and speculating), central banks (managing reserves or intervening), and retail traders. Dealers trade among themselves in the interbank market, and that is where the tightest prices are found.

Most FX trading is in spot, forwards and FX swaps. A spot trade settles in two business days (T+2) for most pairs. A forward settles on a later agreed date at a rate fixed today. USD/CAD is a common exception, settling in one business day. Spot is the base for everything else, because forward rates are built from spot plus interest differentials.

A quote such as EUR/USD = 1.0850 means 1 EUR (the base currency) costs 1.0850 USD (the quote or terms currency). From a USD investor's view this is a direct quote (domestic currency per unit of foreign currency). From a euro investor's view, the same rate is an indirect quote (foreign currency per unit of domestic currency). Inverting a quote switches between the two: USD/EUR = 1 ÷ 1.0850.

Dealers quote two prices. The bid is the price at which the dealer buys the base currency. The ask (offer) is the price at which the dealer sells it. The ask is always higher than the bid, and the difference is the spread, the dealer's compensation and a measure of liquidity. A cross rate is an exchange rate between two currencies derived from each one's rate against a third currency, usually USD.

Key formulas to remember

Quote convention: A/B = x means 1 unit of A (base) costs x units of B (quote); The base currency is always one unit. The quote currency is the price.
Inverse quote: B/A = 1 ÷ (A/B); Converts a direct quote to an indirect quote and back.
Inverting bid and ask: Bid(B/A) = 1 ÷ Ask(A/B); Ask(B/A) = 1 ÷ Bid(A/B); Bid and ask swap places when you invert. Do not invert each side into itself.
Bid-ask spread: Spread = Ask − Bid; Quoted in pips or as a percentage of the midpoint.
Percentage spread: Spread % = (Ask − Bid) ÷ Midpoint, where Midpoint = (Bid + Ask) ÷ 2; Allows comparison of liquidity across pairs.
Cross rate (both quoted against USD as base): A/B = (USD/B) ÷ (USD/A); Bid(A/B) = Bid(USD/B) ÷ Ask(USD/A); Ask(A/B) = Ask(USD/B) ÷ Bid(USD/A).
Cross rate (chain rule): A/C = (A/B) × (B/C); Bid × bid gives the bid and ask × ask gives the ask, but only when both quotes are already in chain form (A/B and B/C). Check that currency B cancels. For two USD-base quotes, do not multiply sides directly. Use Bid = Bid(USD/B) ÷ Ask(USD/A).
Percentage change in a currency: Change in base value = (S1 ÷ S0) − 1 for quote A/B; A rise in A/B means the base A appreciated and the quote B depreciated.

How to solve FX Market Structure and Quotations questions

Use this routine for any quotation, spread or cross-rate question. Most errors come from the base currency and the side of the spread. Quotes are always the dealer's prices, so think from the dealer's side first and then translate to the client.

1Write each quote as BASE/QUOTE and say it in words: 1 base costs x quote.
2Decide who is trading and in which direction. The dealer buys the base at the bid and sells it at the ask. The client does the opposite.
3Work out which currency the dealer buys and which the dealer sells. Use the bid if the dealer buys the base (the client sells it), and the ask if the dealer sells the base (the client buys it).
4For cross rates, arrange the quotes so the common currency cancels. Invert quotes where needed, swapping bid and ask when you invert.
5Multiply bid by bid and ask by ask once the chain is set. Confirm the result is in the pair you want and that bid is below ask.
6Compute the spread as Ask − Bid, or as a percentage of the midpoint if asked to compare liquidity.
7Sanity check: the client should always get the worse of the two rates, and a cross-rate spread is usually wider than each leg in percentage terms.

Quickest way: Cancel-the-currency shortcut

When to use it: Use it for cross-rate and conversion questions where you must pick bid or ask quickly. Here you take the client's side and trade at the dealer's quote.

Write the amount you start with (as the client) and its currency.
Multiply or divide by the quote so that the unwanted currency cancels. If the currency you hold is the base, multiply by the bid (the dealer buys it from you). If it is the quote, divide by the ask (the dealer sells you the base).
For a cross rate, do this in two stages and use the worse rate for the client at each stage.
Check that the final rate has bid below ask. If not, you used a wrong side.

Common mistakes in FX Market Structure and Quotations

Mixing up the base and quote currency
The pair is read as 'EUR per USD' because of the order of the letters.
Fix: Always read A/B as 'one A costs x B'. The first currency is the one priced.
Using the bid when the client buys the base currency
Students think from their own side, not the dealer's side.
Fix: Quotes are from the dealer's view. The dealer buys at the bid and sells at the ask, so the client buying the base pays the ask.
Inverting bid and ask into themselves
1 ÷ bid looks like the natural inverse bid.
Fix: Inverse bid = 1 ÷ original ask. Inverse ask = 1 ÷ original bid. Check that bid stays below ask.
Confusing direct and indirect quotes
The labels depend on the investor's home currency, which changes between questions.
Fix: Identify the home currency first. Direct = home currency per one foreign unit. Indirect = foreign currency per one home unit.
Computing the cross rate bid as bid × ask or mixing sides
Students do not set up the chain so the common currency cancels.
Fix: Write the chain with the common currency cancelling. Use bid × bid for the bid cross and ask × ask for the ask cross after inversions.
Treating spot as same-day settlement
The word 'spot' suggests immediate delivery.
Fix: Remember the standard spot is T+2 business days, with USD/CAD typically T+1. Forwards settle beyond the spot date.

Worked examples

Example 1

A dealer quotes EUR/USD at 1.0840 / 1.0846 (bid / ask). (a) At what rate can a client buy EUR 2,000,000? (b) How much USD does the client pay? (c) What is the spread as a percentage of the midpoint, to three decimals?

Show the solution

The base is EUR and the quote is USD. The client buys the base, so the dealer sells it at the ask: 1.0846.
USD paid = 2,000,000 × 1.0846 = USD 2,169,200.
Spread = 1.0846 − 1.0840 = 0.0006.
Midpoint = (1.0840 + 1.0846) ÷ 2 = 1.0843.
Spread % = 0.0006 ÷ 1.0843 = 0.0553%.

Answer: (a) 1.0846 USD per EUR. (b) USD 2,169,200. (c) About 0.055% of the midpoint.

Example 2

A dealer quotes USD/JPY at 148.20 / 148.26 and USD/CHF at 0.8800 / 0.8806. Find the bid and ask for CHF/JPY (JPY per 1 CHF).

Show the solution

CHF/JPY = (USD/JPY) ÷ (USD/CHF), since USD cancels.
Bid CHF/JPY (dealer's view): the dealer buys CHF and gives JPY. Use the bid of USD/JPY divided by the ask of USD/CHF.
Bid = 148.20 ÷ 0.8806 = 168.2943, which rounds to 168.29.
Ask CHF/JPY (dealer's view): the dealer sells CHF. Use the ask of USD/JPY divided by the bid of USD/CHF.
Ask = 148.26 ÷ 0.8800 = 168.4773, which rounds to 168.48.
Check: 168.29 is below 168.48. The cross spread is 168.48 − 168.29 = 0.19, or 0.19 ÷ 168.385 ≈ 0.113% of the midpoint. The USD/JPY spread is 0.06 ÷ 148.23 ≈ 0.040% and the USD/CHF spread is 0.0006 ÷ 0.8803 ≈ 0.068%. The cross spread is wider than both legs in percentage terms.

Answer: CHF/JPY = 168.29 / 168.48 (bid / ask).

Exam tips

Read the question for who is buying and which currency is the base. Underline both before you touch the numbers.
Expect distractor options built from the wrong side of the spread or from not swapping bid and ask on inversion. Compute the correct side before looking at the options.
When inverting a two-way quote, confirm bid is still below ask. This catches most sign and side mistakes in seconds.
Keep four decimals through the calculation and round only at the end, since pip-level differences separate the answer options.
Know the vocabulary: interbank market, OTC, T+2 spot settlement, direct versus indirect quote, and spread as a liquidity measure.

Practice questions from Foreign Exchange Markets

FX Market Structure and Quotations in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

FX Market Structure and Quotations: frequently asked questions

What is the difference between a direct and an indirect currency quote?

A direct quote gives the number of domestic currency units per one unit of foreign currency. An indirect quote gives the number of foreign currency units per one unit of domestic currency. They are reciprocals, and which one applies depends on your home currency.

How do I calculate a cross rate from bid and ask quotes?

Set up the chain so the common currency cancels, inverting quotes where needed. When you invert, the old ask becomes the new bid and the old bid becomes the new ask. Then multiply bid by bid for the cross bid and ask by ask for the cross ask.

What is the difference between the spot and forward FX market?

A spot trade settles at the standard spot date, usually two business days after the trade, at today's rate. A forward settles on a later date at a rate agreed now. The forward rate reflects the spot rate adjusted for the interest rate differential between the two currencies.

Why is the FX market called over-the-counter?

There is no central exchange where all trades are matched. Dealers quote prices and trade bilaterally or through electronic platforms and brokers. Prices are therefore set by competing dealers, with the tightest spreads in the interbank market.